S&P says State St-managed CDO liquidating assets

Published: Friday, November 9, 2007, 13:03 [IST]

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TOKYO, Nov 9 (Reuters) A collateralised debt obligation (CDO) managed by State Street Global Advisors has started selling assets, ratings agency Standard&Poor's said late on Thursday, raising worries that a wider array of structured securities may do the same.

S&P said it slashed its ratings on Carina CDO Ltd's top tranche of securities by 12 notches to the junk level of BB from the top-notch triple-A. S&P also chopped its ratings on the subordinate levels of the CDO, one all the way to CCC-minus.

The trustee of the Carina CDO has started selling the asset-backed securities making up the CDO at the direction of the structure's noteholders, S&P said.

''We believe the liquidation process has begun,'' S&P said in its press release.

CDOs repackage assets ranging from mortgages and credit-card receivables to corporate bonds into securities. The tranches of a CDO are divided so returns depend on credit risk, with the lowest tranches the first to suffer from any asset defaults.

Ratings agencies have slashed the ratings of many CDOs and structured securities this year as surging defaults in U.S. subprime mortgages and the resulting credit crunch have hit the value of their underlying assets.

The S&P action stirred more fears about the exposure of U.S.

financial institutions to credit markets, helping drive the dollar to a fresh record low against the euro in Asia trading and hitting regional equity markets, traders said.

Last month, S&P put 590 ratings on 176 CDOs on watch for a possible cut, affecting .6 billion in debt.

The ratings cut on the Carina CDO is more severe than would be justified by the deterioration of the underlying assets because the decision to liquidate will depress prices and affect all notes that were issued, S&P said.

S&P said the ratings on the top two parts of the CDO would only be trimmed by one or two notches if the assets were not liquidated, but any selling will lead to material losses and market prices may not recover during the liquidation period.

Any asset sales from the Carina CDO would come after its trustee received an event of default notice, a step before potential asset liquidation.

S&P said 14 CDOs have received such default notices, twice as many as the agency said had received the notices a week ago.

Credit analysts at Bank of America Securities said in a note to clients this week they expect more hefty asset write-downs tied to CDOs as ''valuation uncertainty and further market erosions will imply continued increased losses.'' The Carina CDO is managed by State Street Global Advisors, a unit of State Street Corp A spokeswoman at State Street in Boston could not immediately be reached for comment.

State Street has become embroiled in the problems plaguing financial institutions from the surge in defaults on subprime mortgages that led to this year's credit crunch.

Three customers of State Street filed a suit last month against State Street Global Advisors and affiliate State Street Bank over losses suffered from exposure to subprime mortgages.

State Street is also involved in the asset-backed commercial paper market, which ran into trouble in August when investors balked at rolling over their holdings on worries about the exposures of some funds to subprime mortgages.

Over the past few weeks Wall Street banks have announced billions of dollars in asset write-downs tied to structured securities and subprime mortgages, leading to the departures of chief executives at Merrill Lynch and Citigroup REUTERS BJR GC1218